A classroom price index and purchasing power

DEMO STUDY NOTE — All numbers are synthetic. This original teaching example is not an empirical research finding, an official Cambridge resource or an exam mark scheme.

Topic reference: Cambridge International AS & A Level Economics (9708), 2026–2028; AS Level topic 4.6.

Question

Can wages rise while purchasing power falls? This simplified basket has base-period expenditure weights of 60% for food and 40% for other goods. These weights and prices are synthetic; they do not describe an official CPI.

Worked example

Both component indices start at 100. They rise to 112 and 106. The weighted index becomes 0.6 × 112 + 0.4 × 106 = 109.6, a 9.6% increase. If the nominal wage index rises to 105, the real wage index is 105 / 109.6 × 100 ≈ 95.80. Real purchasing power falls by approximately 4.20%.

Evaluation

A representative basket need not match an individual household’s spending. Substitution, new products and quality changes complicate measurement. A fall in the inflation rate means prices rise more slowly if the rate remains positive; it does not necessarily mean prices fall.

Try it

Recalculate the index for a household assigning food a weight of 80% and other goods 20%. The result is 110.8. Explain why households can experience different changes in purchasing power.

Download synthetic data (CSV)

Syllabus topic reference: Economics 9708, 2026–2028. These four examples cover selected topics only. Check your school’s AS/A Level course and examination year.